Sheltering Over $100,000 of Your Income From Taxes

Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investment industry teach quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Dmitriy: Welcome to the REI Classroom. My name is Dmitriy Fomichenko. I’m the President and Founder of Sense Financial Services and I will be your host today. The topic of my discussion today is how to shelter over $100,000 of your income from taxes.

Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.

Dmitriy: And you can do that by utilizing a self-directed solo 401(k) plan. A self-directed solo 401(k) plan is a QRP, a qualified retirement plan designed for people who are self-employed or own a small business. One of the great benefits that a self-directed solo 401(k) plan offers, in addition to being a self-directed plan and a self-directed retirement account, which allows you to invest in assets that are outside of the Wall Street, outside of the convention investments, stocks and mutual funds, you can do real estate, trust deeds, notes, private lending and so forth.

Today, I want to talk to you about one of the aspects of a solo 401(k). It’s a high limit on the contribution. There is a great tax-sheltering strategy for many of my clients. A solo 401(k) plan allows you to shelter up to $53,000 per year per plan participant. If you own a business, and today am going to specifically talk about a husband and wife team. If you are a husband and a wife working together in your business, an example I’m going to use is a real estate agent. Many of my clients are real estate agents.

If you are a real estate agent and you’re working with your spouse and your spouse may or may not be a real estate agent. Your spouse might be just helping you in the business, maybe from the accounting standpoint or marketing standpoint or your spouse might be a real estate agent too. That’s very common where both husband and wife are real estate agents. Maybe one of the spouses is a broker. This way, then you have your own small business as a real estate agent or broker and you can have your small business adopt the qualified retirement plan or a solo 401(k).

As a plan participant, you are able to contribute up to $53,000 into your retirement plan. This is all tax-deferred income. If your spouse is also involved in the business, your spouse can contribute additional $53,000. If you combine the two, that’s over $100,000. Think about this, if you are a husband and wife and you are making, say, $250,000 combined in income, if you are able to shelter up to $100,000 from your income, what is that going to do for you? Think about the tax impact. I’m not a CPA, I’m not an accountant, but I do understand basic numbers.

Again, if you are making $250,000, instead of paying taxes on $250,000, you’re going to lower your taxable income by $100,000, let’s say, in this example. Your net taxable income is going to be $150,000 instead of $250,000. What’s that going to do to your tax bracket? It is going to drop it significantly. Instead of being in maybe a 40% tax bracket, you’re probably going to go below the 30% tax bracket. Not only you are going to pay lower taxes on your amount, but you are going to pay that in smaller amounts. The difference is going to be in tens of thousands of dollars. Instead of paying that to Uncle Sam, you can take those funds and you can actually shelter it into your own retirement account.

So solo 401(k)s are awesome vehicles to use not only to gain control over your retirement funds and invest in something that you understand and you can control. I’m sure you will agree with me. The stock market is not something that you and I can control. We cannot control that. We cannot what is going to happen with the stock market tomorrow, a week from now, a month from now a year from now. We can guess. We can do certain things to maybe minimize our risks, but ultimately you and I we cannot control the decision that those companies that you invest in are going to make. The principles of those companies are going to make.

But when you pick your retirement dollars and invest to a piece of property, for example, you have control of what you are going to invest. You have control what kind of improvements you are going to do to the property. You can control the timing. You can control the tenants that are going to be occupying the property. So there is a lot more control.

So, again, that’s one aspect of self-directed retirement accounts. In addition to that, the ability to minimize your taxes by sheltering large portions of your income into the solo 401(k) is an asset, too. I think everyone should be looking at how to minimize your taxes, especially if you are income is growing, if your business is doing well, you definitely should utilize the tools that are available to you so that you can put those funds into your own retirement account instead of giving them to Uncle Sam. Well, that’s my tip for today. Thank you for joining us and I will see you next time.

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